Public Interest Winding-Up Petitions and SPAC Nation - A Cautionary Tale?

Whilst the winding-up of companies, including charitable companies, by the Court is not unusual, in most cases a compulsory liquidation (as a winding-up by the Court is commonly known) comes about as a result of the entity's insolvency and due to a creditor petitioning for liquidation on the grounds of the company's inability to pay its debts. The compulsory liquidation of SPAC Nation is therefore somewhat unusual as it was brought on 'public interest' grounds rather than merely on the grounds of insolvency.

This article seeks to explain to trustees, and others involved in charitable companies, why a public interest winding-up may occur and what can be done to avoid them.

What Is a Public Interest Winding-Up?

Section 124A of the Insolvency Act 1986 ('IA1986') provides that a company, including a charitable company, may be wound-up if it is "expedient" and "in the public interest" to do so. A petition to wind-up a company in the public interest is brought by the Secretary of State for Business Energy and Industrial Strategy ('Secretary of State'). A creditor who is owed money by the company cannot petition on the grounds of public interest and must instead petition under section 123 of IA1986. It should be noted however that a company does not need to be insolvent for a public interest winding up order to be made.

When considering whether a petition should be brought to wind up a charity in the public interest, the Secretary of State may take a number of factors into account including, but not limited to:

• the legal structure and governance of the charity
• the financial circumstances of the charity
• the conduct of the charity, its trustees and employees
• whether the charity is continuing to operate
• the status and outcome of investigations undertaken and information obtained by the Insolvency Service, the Charity Commission and other authorities such as the police
• complaints received from the public in connection with the charity
• media coverage and publicity

The Secretary of State will prepare a petition to wind up the charity, and issue it in Court along with the evidence it intends to rely on. The petition is then listed to be heard by the Court some weeks later in a hearing at which the charity can be represented if it so wishes.

In deciding whether to make a winding-up order in the public interest, the Court will look at a number of different elements dependant on the grounds that are put forward by the Secretary of State in its petition. This could include commercial probity, the business and operating practices of the charity in question, the conduct of the charity in assisting in any investigations and also any admissions or acknowledgment by any trustees in connection with their conduct.

So What Happened with SPAC Nation?

SPAC Nation was incorporated in 2012 as a charity set up to advance Christianity. It worked predominantly in London helping vulnerable people, youth and former offenders.

The charity found itself shrouded in controversy following a BBC documentary in 2019 which accused them of improper fund raising practices and suggested that the church left young people with thousands of pounds worth of debt. Both the Metropolitan Police and The Charity Commission commenced investigations into SPAC Nation and its members. The Insolvency Service also received numerous complaints about SPAC Nation and started enquiries of their own into the Church's group activities. Part of the Insolvency Services' investigations were conducted on a confidential basis under the provisions of section 447 of the Companies Act 1985 (as amended).

The Insolvency Service found that SPAC Nation failed to comply, or only partially complied, with statutory requirements such as keeping data to support claimed donations or maintaining accounting records to support £1.87m of expenditure. It also found that the charitable company's directors were unable to provide documentation showing evidence of the church's members. The charity's financial statements in the two years to December 2019 seemed unusual and inconsistent because they suggested that the company had spent £610,000 on rent when the company didn't actually appear to have a single base of its own.

The Court's Findings

The Court concluded that SPAC Nation operated with a lack of transparency, filed suspicious or incorrect accounts and was insolvent at the time of the hearing of the petition. The Court also found that SPAC Nation provided inconsistent information to the Insolvency Service and to the Charity Commission and failed to deliver up adequate accounting records.

The Court's decision to wind-up SPAC Nation recognises the severity of conduct of the charity and its directors/trustee and sends a strong message to trustees that being a charity is not an excuse for a failure to keep proper records and accounts.

It would appear, from some of the comments by the Court and the Insolvency Service, that co-operation along with a willingness  by trustees to recognise improper conduct and remedy the same may, in certain circumstances, be sufficient to avoid a winding-up on public grounds. However in cases like SPAC Nation, where the level of suspected impropriety was so severe, it is unlikely that mere acknowledgement of bad behaviour would be sufficient.

What Happens Next?

SPAC Nation remains the subject of a statutory enquiry by the Charity Commission who are examining financial governance and safeguarding matters at the charity.

The Official Receiver appointed as liquidator of the charity will also be continuing investigations to assess whether claims can be brought against the directors of the charity pursuant to the provisions of IA86. This could include claims to claw back transactions that the charity entered into and to trace funds that the charity paid out improperly.

It would not be a surprise if further action was taken against the individual trustees and directors of SPAC Nation including, but not limited to, disqualification action and compensation orders.

Lessons for Trustees

The case gives examples of the type of conduct which could lead to an order for a compulsory liquidation in the public interest to be made. In order to avoid finding themselves in such situations, trustees should bear in mind the following:  

• Regular board meetings should be held to consider a charity's finances, governance, resilience and safeguarding issues and trustees may find it helpful to consult the Charity Commission's guidance in this regard.
• In particular, trustees should be mindful of the contents of the Charity Commission's note CC12 in connection with managing a charity's finances.
• Trustees of charities should hold regular Board Meetings to review and monitor a charity's finances and other business and operating affairs, including fundraising activity and donations.
• Accounting records and statutory records should be properly maintained, kept up to date and be easily accessible.
• Decisions and discussion points at board meetings should be documented.
• Consideration should be given as to whether any circumstances have arisen which may require a Serious Incident Report to be filed with the Charity Commission.
• Trustees are reminded of the importance of taking early professional advice in times of distress or if an investigation is commenced.

In situations of distress, or in circumstances where misconduct is suspected, perhaps by some but not all trustees, it is important for an individual trustee to bring his or her concerns to the attention of the board and encourage the board to seek professional advice. Individuals are also reminded that, particularly in the event of disagreement at board level, a trustee may want to take independent legal advice on their own personal position.

The matters covered by this article are complex and the position will be different for each charity depending on its circumstances.

If you have any questions about the contents of this article, please contact Ambuja Bose in our Insolvency and Restructuring team on 020 7665 0990, or complete the form below.